The European Banking Stress Tests
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Thursday, July 21, 2011 The Times Business I 9 Stock Market Review The European banking stress tests he much anticipated Edward Rizzo stress test results con - ducted by the EU’s new banking regula - Mr Rizzo is director of Rizzo, tor, the European Farrugia & Co. (Stockbrokers) Banking Authority Ltd. T(EBA), were published late last Fri - day afternoon. The EU-wide stress tests, carried out across 90 banks covering over 65 per cent of the total assets of the EU banking system, aimed to assess the resilience of European banks to severe shocks and their specific solvency to hypothetical stress events. The exercise required that the results and weaknesses identified are acted on to improve the resilience of the European financial system. The EBA announced that eight banks failed the test with a total capital shortfall of €2.5 billion. They include five from Spain (Banco Pastor SA, Caja de Ahorros Miguel Angel Fernandez Ordonez, governor of the Bank of Spain, gestures as he announces four regional del Mediterraneo, Banco Grupo savings banks – Caja Mediterraneo, CatalunyaCaixa, Unnim and CajaTres – failed the stress tests, along with Caja3, CatalunyaCaixa and Banco Pastor, in Madrid last week. Photo: AFP Unnim), two Greek banks (EFG Eurobank Ergasias SA and Agricul - ranking in 33rd place among the 90 last week were the results achieved ing Deutsche Bank about €14 bil - tural Bank of Greece) and Austria’s banks. by two of the largest banks in Spain lion. Oesterreichische Volksbank. The Marfin Popular Bank of Cyprus (BBVA with a ratio of 9.2 per cent The recent tests may not succeed EBA requires each national super - (the largest shareholder of Lom - and Santander at 8.4 per cent) and in reassuring international visory authority to ensure that bard Bank Malta plc) was among Italy’s Intesa Sanpaolo with a Tier investors and this could place these banks present a plan within the sixteen banks that scraped 1 ratio of 8.9 per cent. While some added pressure on international the next three months to restore through the test. The estimated international analysts noted that markets during the summer their capital positions to at least five Core Tier 1 capital ratio of Marfin the clean bill of health given to months. per cent. Popular Bank (the second largest these three large institutions could It comes at a time when various Meanwhile, a further 16 banks bank in Cyprus) amounted to 5.3 provide a timely boost to help experts are talking about the onset only just managed to scrape per cent under the adverse sce - relieve the recent funding pressure of another financial crisis. The through the test as their core Tier 1 nario envisaged in 2012. Shortly that these banks have experienced, focus seems to be on the contagion ratio dropped below six per cent – after the announcement of these there has also been widespread effect of the eurozone sovereign only slightly above the minimum results, Marfin Popular Bank criticism in the international media debt crisis which has started to pass mark of five per cent. These 16 announced that it will proceed with on the way these tests were con - spread to Italy. banks were given nine months a €2 billion asset reduction pro - ducted. However, few investors may (until April 2012) to raise more gramme by mid-2012 to further The critics claim that the tests have noticed that effectively the equity. strengthen its solvency position. were not tough enough, mainly United States will run out of money The data compiled by the EBA Marfin said that the planned asset because they did not account for to pay its bills on August 2 unless revealed that banks held €98.2 bil - reduction would lead to an any sovereign failure even though Congress agrees to a new deal to lion of Greek sovereign paper, increase of 0.81 percentage points Greece seems to be on the brink of increase the national debt pile €52.7 billion of Irish sovereign to its Core Tier 1 ratio by June 2012. default. The EBA assumed a 25 per above the current ceiling of $14.3 paper and €43.2 billion of Por - Marfin’s exposure to European sov - cent write-down on 10-year Greek trillion. tuguese sovereign paper. ereign debt as at 30 June 2011 was government bonds held in banks’ While the US can easily be Similar to last year, Bank of Val - estimated at €3.9 billion, including trading books although the bonds regarded as “too big to fail”, rating letta plc was the local participant in €2.8 billion to Greek sovereign currently trade at about 51 per cent agencies Moody’s as well as Stan - the stress tests since it is the largest bonds, €380 million to Greek short- of their 100 per cent nominal value. dard & Poor’s have sent a warning banking group in Malta. BoV term bills and €50 million to Irish Some critics stated that assuming shot in recent weeks to politicians announced that it comfortably sovereign paper. higher writedowns of 40 per cent and the markets. Moody’s placed passed the test as it enjoys strong The strongest banks in the test on Greek bonds and 25 per cent on America’s AAA-rating (which has capital buffers. BoV’s Tier 1 Ratio were dominated by smaller lenders Portuguese and Irish debt, the been in place since 1917) under (an indicator of balance sheet and institutions namely Spain’s additional capital requirements review for a downgrade while Stan - strength), decreased minimally to Banca March and Ireland’s Irish would increase to over €45 billion. dard & Poor’s has taken a tougher 10.4 per cent under the modelled Life and Permanent. However, the According to some analysts, if view and announced that the US adverse scenario, placing it among results of these institutions were the pass mark were set at seven per stands a 50 per cent chance of a the soundest EU banks. The results boosted by the recent injection of cent (rather than five per cent), downgrade in the next three achieved by BoV are important not government bail-out money. Scan - which is the minimum to be months. Despite these warnings only to the bank itself but also to dinavian lenders also ranked applied for banks from 2013 under from the credit rating agencies, the the entire local banking and finan - highly with the Danish banks Syd - the Basle III agreement, the yield on US government paper is cial system. In recent years Malta’s bank in fourth position with a ratio requirement for extra capital at the still around three per cent presum - banking system has received much of 13.6 per cent and Danske Bank European banks would rise to €41 ably due to the “safe haven” status praise, especially since it proved its in sixth place with a ratio of 13 per billion. JP Morgan estimated that afforded to the world’s largest resilience in the face of adverse cir - cent. BoV’s ratio of 10.4 per cent based on a seven per cent capital economy. cumstances during the interna - placed the Maltese bank in a very target, and including writedowns The unprecedented effect of tional financial crisis. respectable 12th place with other on sovereign debt in the banking these events could send shock BoV’s major competitor, HSBC larger institutions such as BNP book, 20 banks would need to raise waves across global financial mar - Bank Malta plc, was not included Paribas in 38th place (7.9 per cent), capital, including Lloyds Banking kets bringing back the severe con - in the recent stress tests. However Lloyds Bank Group in 40th position Group (with a €25 billion shortfall), sequences that were experienced HSBC Malta’s majority share - (7.7 per cent) and Barclays Bank while French banks including Soci - only a few years ago following the holder, HSBC Holdings plc, plc in 44th place (7.3 per cent). ete Generale would require €20 bil - bankruptcy of the US investment achieved a ratio of 8.5 per cent, Among the surprises that emerged lion, and German lenders includ - bank Lehman Brothers. BoV’s ratio of 10.4 per cent Rizzo, Farrugia & Co. (Stockbro - solicitation or an offer to buy or holdings in the securities herein representation or warranty is pro - kers) Ltd, “RFC”, is a member of sell any securities or related finan - mentioned and may at any time vided in respect of the reliability placed the the Malta Stock Exchange and cial instruments. 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